News & Views

Balancing innovation and consumer protection - The FCA's perspective on AI in credit decisions

The use of artificial intelligence (AI) in financial services is rapidly increasing, promising innovation and growth. This push for technological advancement, however, needs to be carefully balanced with the need to protect consumers, as emphasized by the FCA's principle of Consumer Duty.

The FCA's recent research note, "Credit where credit is due: how can AI's role in credit decisions be explained?", provides valuable insights into this complex landscape. The research focuses on AI explainability in the context of consumer credit decisions, exploring how different ways of explaining AI-assisted decisions can impact consumer outcomes.

The FCA conducted an online experiment with 8,860 UK adults, testing four different "explanation genres" for AI-assisted credit decisions. These ranged from a simple overview of the data used by the AI to a detailed explanation including the specific rules governing the decision.

Interestingly, the research found that the most effective explanation was often the simplest one, focusing on the data used in the decision-making process. More detailed explanations, while seemingly more transparent, could sometimes hinder consumers' ability to identify errors in the AI's decision-making.

This finding highlights the challenge of balancing innovation with consumer protection. While AI has the potential to improve efficiency and accuracy in credit decisions, it's crucial to ensure that consumers understand how these decisions are made. Overly complex explanations can be counterproductive, potentially obscuring rather than clarifying the process for consumers.

The FCA’s research underscores the importance of clear and concise communication when explaining AI-assisted decisions. This approach aligns with the Consumer Duty, which emphasizes the need to empower consumers to make informed decisions.

As financial services continue to evolve with the adoption of AI, it's essential for firms to prioritize consumer understanding and transparency.

The FCA's research provides valuable guidance on how to achieve this balance, ensuring that innovation in credit decisions goes hand in hand with consumer protection.

At O'Connors, we are committed to helping our clients navigate this evolving regulatory landscape. We believe that AI can be a powerful tool for growth in the financial services industry, but it's crucial to implement it in a way that is responsible, transparent, and puts the needs of consumers first.

For further information, please email Joshua Bates or call 0151 906 1000.